A limited liability company (LLC) is separate from the person who files the formation documents, as well as the members running the LLC. Frequently, people who might otherwise start sole proprietorships establish LLCs as a way of protecting themselves financially while running a small business.
In theory, the sole member operating an LLC has a degree of separation and protection from the financial obligations of the organization. If the business fails, the owner can file dissolution paperwork and may even pursue Chapter 7 bankruptcy for the organization as part of that process.
Business creditors might assume that they have no options for collecting outstanding debts owed by an LLC when the company closes or files for bankruptcy. However, in some cases, it may be possible to hold the owner responsible for the debts owed by the organization.
Creditors can sometimes pierce the corporate veil
An LLC is one of the several types of business structures that help separate individuals from companies. There are scenarios in which outside parties can ask the courts to hold owners accountable for the debts owed by an LLC. In cases where there may have been some kind of financial misconduct, the courts can pierce the corporate veil. In other words, the courts can set aside the protection of the LLC and hold the owner accountable for business obligations.
Actionable forms of misconduct may include fraudulent transfers, taking on debt fraudulently without an intent to repay it and commingling business resources with personal finances. Provided there has been some kind of financial misconduct related to the business, creditors can sometimes ask the courts to pierce the corporate veil.
If the courts agree to do so, creditors can hold the sole member of the LLC responsible for certain business debts. If the courts pierce the corporate veil, the owner or sole member of the LLC may be vulnerable to attempts to garnish their wages or pursue collection activity based on their personal assets as opposed to the resources owned by the business they previously operated.
In scenarios where the organization itself no longer exists or has become insolvent and cannot pay company debts, looking into alternate means of collecting valid business debts can be a worthwhile undertaking. Piercing the corporate veil is one of several solutions available for frustrated creditors facing financial losses when a business debtor files for bankruptcy or ceases operating. Companies may need help evaluating their options for collecting valid debts owed by another business.
